Lina Khan is no fan of Amazon Inc. (AMZN). In 2018, as a law student at Yale University, she authored an influential paper that called for greater antitrust regulation of the e-commerce giant.
Her main argument: Amazon does not behave rationally. While most publicly traded companies want to generate profits, Amazon does the opposite: the company is willing to lose a lot of money in pursuit of growth.
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For this reason, Khan, who now chairs the Federal Trade Commission, and members of Congress have suggested Amazon should be broken up. After all, how can you compete against a rapidly growing company that doesn’t care about making money?
But here’s why such arguments are increasingly mute: the Amazon she describes in her Yale paper no longer exists.
The company has significantly retreated from its original modus operandi of spending what it takes to win over consumers. Instead, the Amazon of today talks of financial discipline, cutting costs, and boosting profit margins and financial returns. The hyperactive, eager-to-please teenager has morphed into something that resembles a middle aged, bifocals-wearing soccer mom worried about her 401(k).
“Change is always around the corner,” CEO Andy Jassy said in the company’s most recent annual letter to shareholders. “Sometimes, you proactively invite it in, and sometimes it just comes a-knocking. But, when you see it’s coming, you have to embrace it.”
For customers used to getting everything and anything from Amazon for an insanely low price, the change Jassy described is likely to be unsettling. Shoppers can expect to see a company charge more for products and services or even eliminate them all together if they don’t deliver the profits Amazon wants.
The company last year raised Amazon Prime prices nearly 15% to $139 per month from $119. In January, the retailer said shoppers will now need to spend at least $135 on groceries to receive free home delivery within a two hour window. The previous minimum order was $35.
Amazon is now charging some people a fee for returns. It will also slap “frequently returned” labels on products that people consistently send back to the retailer.
Amazon recently shut down Fabric.com, The Book Depository, which distributed free books to people around the world, and Amazon Cares. It abandoned efforts to develop physical store concepts like Bookstores and 4 Star stores. The company ceased developing personal devices because it didn’t see a path to “meaningful returns.”
“This is the beginning of the end of Amazon as we know it,” said Brittain Ladd, a retail consultant and former grocery strategist for the company.
Amazon Actually Meant It
Of course, all companies eventually mature. Growth gives away to cash flow, profits, and shareholder returns.
But the world has never seen anything like Amazon. The company, founded in 1994 by Jeff Bezos to sell books over the Internet, forged its own way to measure success.
“We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth,” Bezos wrote in his first letter to shareholders, “the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand.
“We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.”
Of course, most companies would say they value long-term growth over short-term payoff. Amazon, however, actually meant it.
Even after going public in 1997, Amazon over the the past two decades continued to behave as a startup, bulldozing its way into selling anything and everything online while expanding into health care, cloud computing (Amazon Web Services) and Hollywood (Amazon Studios). It built its own smartphone (which flopped), e-book reader in Kindle, and digital voice assistant Alexa.
When Bezos wasn’t satisfied with UPS, the company constructed its own air freight and ground delivery services. He declared on 60 Minutes that drones were the future of package delivery, forcing every competitor to explore the technology.
It also wasn’t enough to have just one headquarters. In 2017, Amazon announced it would spend $5 billion to open a second headquarters on the East Coast. The facility would host another 50,000 workers.
You could say Google, now Alphabet Inc. (GOOGL) also expanded into everything. But Google makes tons of money from search-related advertising. At Amazon, profits have been, and continue to be, scarce to non-existent.
And much to the frustration of its competitors, Wall Street has allowed Amazon to get away with it. While investors would normally punish companies that have remained this unprofitable for so long, there seems to be some kind of unwritten exception to Amazon.
Amazon's Achilles Heel
But something has changed at Amazon over the past five years, starting with the company’s acquisition of Whole Foods Market. The deal was supposed to finally push Amazon into expanding into physical retail just as it conquered e-commerce.
Instead, Whole Foods became “Amazon’s Achilles’ heel,” said Burt Flickinger, managing director of Strategic Resources consulting group.
For some reason, Amazon was oddly passive with Whole Foods, allowing founder John Mackey to run the business. Moreover, Amazon did not make any further acquisitions.
As a result, Amazon is falling further behind in groceries, especially as Kroger Company (KR) and Albertsons, the country’s two largest supermarket chains, plan a monster $24.6 billion merger. As a result, Amazon would need to spend tens of billions of dollars each year on capital investments to keep pace, Flickinger said.
But Amazon appears to lack any urgency on the matter, preferring instead to tinker with its Amazon Fresh format.
“We've decided over the last year or so that we're not going to expand the physical Fresh doors until we have that equation with differentiation and economic value that we like,” Jassy recently told investors.
Lots Of E-commerce, Little Profit
Another major turning point was covid.
During the global pandemic, shares of Amazon and other retailers quickly shot up as demand for online deliveries soared. But the company, despite its market power and expertise, has never figured out how to make its core e-commerce business consistently profitable.
In 2019, one year before the pandemic, Amazon generated $14.5 billion in operating income, $7 billion in North America alone. Last year, the company generated $12.2 billion in operating income, a 16% decline from two years prior. North America actually lost $2.8 billion.
So even as e-commerce sales soared, Amazon’s profits plummeted. Why? Building and maintaining a supply chain to support e-commerce is very expensive. In 2022, Amazon reported a whopping $501.8 billion in total operating expenses, more than double just four years ago.
For retailers, including Amazon, the pandemic fundamentally altered how they viewed e-commerce, Ladd said. Retailers are no longer just blindly chasing e-commerce sales just for the sake of growth.
“Online customers today need to be profitable too,” he said. “E-commerce growth is not enough anymore to lose money.”
Cut Costs, Boost Profits
Therefore, it’s no accident that Bezos chose Jassy to succeed him as CEO in 2021 (Bezos remains executive chairman). As leader of AWS, Jassy ran the only business at the company that generated profits.
Since Jassy took over, Amazon’s stock has dropped about 45%. Moreover, the company has retreated from its growth identity, in ways both obvious and subtle.
Since November, Amazon has laid off 27,000 workers with probably more to come. The company paused its plans for the second headquarters and seems to have lost interest in its drone program.
“Over the last several months, we took a deep look across the company, business by business, invention by invention, and asked ourselves whether we had conviction about each initiative’s long-term potential to drive enough revenue, operating income, free cash flow, and return on invested capital,” Jassy wrote in the most recent shareholders letter.
Behind the scenes, Amazon is weeding out less profitable vendors and squeezing others for more cash, said Martin Heubel, a former Amazon senior category manager turned strategy consultant.
In the past, Amazon offered a way for brands of all kinds to instantly reach an enormous consumer marketplace. But now, Amazon is emulating dominant brick and mortar chains like Walmart in treating vendors less like partners and more like profit centers, Heubel said.
For example, vendors normally pay retailers what’s called “trading allowances” or “brand investments” in exchange for better placements in the physical or online store. Though widespread, trading allowances are questionable practices and have occasionally drawn scrutiny from the Securities and Exchange Commission.
Put simply, vendors are increasingly bearing the brunt of Amazon’s quest for profits, Heubel said.
Should Amazon Break Itself Up?
In many ways, Amazon is just another case of a company just running its course. And that’s perfectly fine and natural.
“They wanted to become the biggest e-commerce company in the world and they did,” Ladd said.
But what now? To recharge growth and regain its cultural swagger, Ladd thinks the company should perhaps split up.
Breaking up Amazon is not a new idea. But given the company’s evolution, Amazon should consider it, Ladd said. He compared the e-commerce giant to the likes of General Electric and Standard Oil, two similarly enormous firms that eventually spun off various assets.
Ladd suggested Amazon split itself into these separate businesses: grocery (Amazon Fresh, Whole Foods), general e-commerce, AWS, logistics, banking, and entertainment, which includes the original shows it streams through Amazon Prime.
Such a plan could pre-empt antitrust efforts from the United States and Europe. After all, Alibaba Group Holding (BABAF) , widely considered the Amazon of China, recently announced plans to split itself into 6 businesses — Cloud Intelligence Group, Taobao Tmall Commerce Group, Local Services Group, Cainiao Smart Logistics, Global Digital Commerce Group, and a Digital Media and Entertainment Group. These units could possibly go public to raise more capital.
For Amazon to remain as is, a lumbering giant in search of profits, the company will inevitably face rising consumer wrath just as Netflix Inc. (NFLX) did when it decided to raise subscription prices and crack down on password sharing.
Such blowback, however, arguably cuts Amazon’s image in deeper ways than most companies. Since its inception, the giant has redefined what it means to offer value to consumers. From low prices that consistently undercut competitors to one day/one hour shipping, Amazon has pushed the limits of what consumers can expect from a retailer.
But Amazon is changing. In fact, evidence suggests that Amazon might be transforming into something no one thought possible: a company indistinguishable from the rest of the corporate pack.
